Being forced to commit fraud to get my money back
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Online purchases do have risks for both buyers and seller. There is no way to avoid all risks, but the buyer's first line of defense is good judgement when selecting an online vendor.
In this case, I think the best option is to return, with documented tracking, so that PayPal can force the refund, but not for your return shipping. If USPS asks for the item, just indicate that it was returned. USPS may then recall the refund given to the seller for insurance. The seller should have refunded all costs to you immediately since it was shipping damage--and without your returnining anything.
It seems obvious you selected a disreputable vendor; PayPal can't protect against that.

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